It’s hard to argue that the cryptocurrency world is not here to stay when you see…

Tech luminaries (Andreessen, Dixon) come out and say “[Crypto tokens] will soon be seen as a breakthrough in the design and development of open networks, combining the societal benefits of open protocols with the financial and architectural benefits of proprietary networks.” I listen and want to participate. (more)

Coinbase having more users than Charles Schwab (more) – “Charles Schwab reported 10.6 million active brokerage accounts for October, in contrast with 11.7 million users in October for Coinbase, the leading U.S. platform for buying and selling bitcoin.”

Putting private permissioned blockchains aside for the moment (this will be a follow-on note) I tried below to outline all the basic arguments for and against cryptocurrencies such at Bitcoin & Ether AS WELL AS the tokens that rely on the success of currencies such as Bitcoin & Ether. I will eventually use this as a rough way to determine if this is a fad or a true economic tidal wave…

Pro #1: A cryptocurrency such as Bitcoin or Ether is a more effective/efficient currency than FIAT (it’s scarce (Bitcoin has 21M ceiling yet fiat is easily printed), easily divisible, durable (a ledger entry that exists on computers around the world versus fiat that slowly loses value due to inflation over time), fungible, recognizable, can’t be counterfeited, highly portable (without a need for a bank), permissionless (versus fiat where you need permission to send dollars to some nations like Russia), decentralized (versus fiat that is controlled centrally) and most importantly programmable (which fiat is not)).

Con: Speed: Public permissionless blockchain networks are slow and currently do not scale to yield transaction throughput on the scale of Visa (1700 tps)—Bitcoin is ~7 tps and Eth is ~10 tps (more)

Rebuttal: Layer 2 solutions (Lightning & Raiden) are being built to accept many more transactions per section.

Con: Proof of Work Consensus systems use enormous resources: Public permissionless blockchain networks (especially those that use PoW consensus) require enormous resources (bandwidth, memory, and CPU). The ledger is shared and maintained by every node of the network. To be a node in the network, one needs to download the whole ledger/blockchain and keep it on their system. Distributing a ledger potentially consumes over a hundred times the energy of single databases. Scaling up from relatively niche use could be impossible. Also, for cryptocurrencies that using proof of work (mining) as their consensus mechanism–If the market value of the reward for mining drops below the cost of mining, then miners will stop mining, and nobody will process transactions.

Rebuttal: Proof of Stake consensus systems and Layer 2 solutions

Con-Rebuttal: Proof of Stake may be more expensive than Proof of Work—see this.

Con: Cryptocurrencies are not a “stable” store of value. They operate less like a “currency” and more like a “stock” whose price fluctuates. What % of today’s BTC is being used to purchase services? Less than 1%? With crypto there is no certainty of its future value–in order to be money, you need to be able to price products & contracts in it… but none of these things can be done with crypto when its price is so volatile. Artificial scarcity is essential to cryptocurrency’s value but works against making it a viable medium of exchange. Why would you buy a soda with Bitcoin if one day it’s $1, the next $5, and the day after that $10?

Rebuttal: In economics, something has value if it checks the following two boxes: scarcity and utility. Scarcity means that something has a finite supply. In the case of bitcoin, the cryptocurrency has a set cap of 21 million bitcoins. Cryptocurrency’s utility lies in the fact that no government, bank or single person has control over it hence it can’t be toppled by corruption at the top. Gold has underlying utility value in applications such as semiconductors and jewelry. Real estate has underlying value for building, farming, and mining, among others. Cryptoassets have an enormous amount of potential underlying utility value, promising to disrupt just about everything, including payments, record keeping, legal contracts and many other industries.

Con-Rebuttal: Crypto is not scarce–it can be forked off. There are 1500 current currencies and new ones every day. Maybe the network is scarce today much like MySpace was many years ago, but bigger/better networks will constantly be created. Yet there is only 1 gold.

Rebuttal: Volatility is currently high, but volatility is what happens when a market is trying to figure out what the price should be–it will eventually flatten out. Stability is earned with time. The volatility issue is self-correcting.

Con: Deflation is bad. Bitcoin caps out at 21 million total BTC in circulation; Litecoin at 84 million LTC. These fixed supply mechanisms give them deflationary characteristics over the long term.

Rebuttal: Ethereum (ETH) chose to uncap the total supply of their coins and opt for long-term, pre-determined issuance schedules. No-cap cryptocurrencies are thus inflationary in nature. The risk with inflationary crypto assets is that new, future coins entering the market will reduce the value of existing coins by increasing the supply relative to demand.

Rebuttal: A crypto asset with deflationary characteristics could theoretically be a better store of value because existing coins are protected from future supply-based dilution.

Con: Cryptocurrency is not ‘required’ for anything other than ransomware payments or illicit dark-web purchases! With fiat—governments require it for citizens to pay taxes. Who requires crypto? Without the requirement of use you will never know the demand (i.e. supply/demand) hence you will never have a stable price given speculators currently drive the demand not use of the currency.

Rebuttal: Crypto may not be required but is a necessity in the developing world (more)

Con: Country-specific monetary policy is required for a stable society, to offer benefits (Social Security, Medicaid, Medicare) to its population and to finance wars

Con–Rebuttal: “it’s also a double-edged sword because it’s likely the beginning of Wall Street creating financial claims to bitcoin out of thin air (and not backed by actual bitcoins), which could offset some of Bitcoin’s algorithmically-enforced scarcity.”-Caitlin Long

Con: Fragmentation: like Linux, many cryptocurrencies are open-source causing new currencies to appear quickly. There are 1500 current currencies and new ones every day.

Rebuttal: The network is the value not the currency/code.

Con-Rebuttal: Maybe the network is scarce today much like MySpace was many years ago, but bigger/better networks will constantly be created.

Con: Lost keys: Cryptocurrency stored in a public permissionless blockchain can be lost forever if someone loses their key. Hence, most people won’t want to maintain their own private keys, and if you don’t maintain your own private keys, cryptocurrencies are essentially no different from fiat money held in banks.

Con: Quantum computing: The entire blockchain assumes that hash problems take a constant time to solve. If someone can solve a hash problem even slightly faster, then the whole blockchain system fails to work.

Rebuttal: This is fear-mongering-any potential security risks are solvable (more and more and more)

Maybe there is enough value in the Pros below to bypass all the Cons above…

Pro #2: A coin such as Bitcoin or Ether can be used for low-cost international money transfers: The current system is a multibillion-dollar industry that exploits immigrants with fees (Western Union skimming a %). With cryptocurrency, the transfer fees are negligible, and the transfer times are near-instant.

Pro #3: A coin such as Bitcoin or Ether can minimize government intervention: Allows citizens to not have their capital tracked by governments as a means of control in the case of 1) Seizure resistance by badly acting governments and 2) Ease of transport of currencies across international boundaries (cryptocurrencies allow you to cross a border with literally a billion dollars in your pocket)

Con: Won’t pass regulatory scrutiny: Governments won’t tolerate the loss of monetary control. The US government specifically is not going to allow wide-scale movement of money within the United States in which it can’t identify the sources and uses. Governments also won’t tolerate illegal commerce (especially if used for terrorism). Eventually, societal pressure to regulate cryptocurrency will increase as more fraud (example: market manipulation) is discovered. Most people want strong governments, and strong governments want to control their own currencies. Net: Governments can make the use of cryptocurrency illegal (much like what the Saudi’s did with Bitcoin more).

Con: Requires Pro #1

Pro #4: A token based on a coin can be a better way to fund an open source network to allow it to compete with a proprietary network (Facebook, Google, Amazon, Microsoft, Apple, Netflix etc.). A token can 1. fund the operating expenses required to host the network (Bitcoin and Ethereum have tens of thousands of servers around the world that run their networks) 2. provide shared computing resources (including databases, compute, and file storage) 3. incent network participants (developers, users of the network and investors)

Con: Requires Pro #1

Pro #5: A cryptocurrency (coin or token based on a coin) can provide for the ability to sell digital goods: For example Music & Photography

Con: Requires Pro #1

Pro #6: A token (based on a coin) can be used to replace the need for a central bank:

Con: Well-run central banks succeed in stabilizing the domestic value of their sovereign currency by adjusting the supply of the means of payment in line with transaction demand.

Great leaders don’t lie and categorize/label whole groups of people as bad. Do great presidents? What we have going on right now is a bit surreal and worthy of debate. Regardless of your support or hate for President Trump, the question I am asking is — are the POTUS’s words having a negative impact on society?

I’m quite surprised that more CEOs, organizational scientists, executive coaches, and leadership development consultants are not broadly discussing the consequences to society of poor ‘Integrity and Honesty’ and ‘objectifying’ entire groups of people.

In a recent HBR.org study “Has high ethical and moral standards” was the number one competency expected of a leader. Given the large number of false statements made by the current POTUS and the competency’s recognized importance, I would have expected more of a debate on the subject. I recently read a great book by Dan Ariely, author of The Honest Truth About Dishonesty that leads me to believe that the impact on society is bigger than one would expect. “Once an environment has had dishonesty introduced, that new normal spreads.” People start thinking things like, “Well, everyone else is doing it”. “It’s been proven that you can take someone who is basically an honest person, put them into a system where the person running the system is corrupt, and they conform. They cheat more and start stealing. If the leader of the system is saying things are corrupt, the leader sets the tone.” Any good leader knows that if a Sr. manager in an organization is dishonest the managers under that person need to be looked at as well. What does this say about the future ethics of our executive staff, Congress, and future state/local leadership?If the behavior that at one time made society feel uncomfortable starts appearing reasonable and standards start loosening to fit common, lesser standards, then our society is on the descent.

Now… then there is the ‘objectifying’ large groups of people… What is the impact on society of the leader of the free world by referring to large groups of people as “rapists” and “terrorists” (some of this can be found here)? Another great book I read long ago is “Leadership and Self Deception: Getting out of the box” by the Arbinger Group. The essence of the book is that when people categorize others in a society as objects versus human beings with feelings, thoughts, and needs then it’s easier to hurt them.

Trump is the result of years of Media bias and Gerrymandering fueled by a giant injection of cash (Citizens United). As agendas get further apart and congress spends less time working a bipartisan agenda and more time working their team’s agenda at the same time bowing to the money that got them elected – the US voter gets more and more angry… and the electorate would vote for mickey mouse before they would vote for a republican or a democrat that smelled like more of the same…

Trump is a symptom of bigger problems that only congress can fix… but congress has no incentive to fix.

A scorpion asks a frog to carry it across a river. The frog hesitates, afraid of being stung, but the scorpion argues that if it did so, they would both drown. Considering this, the frog agrees, but midway across the river the scorpion does indeed sting the frog, dooming them both. When the frog asks the scorpion why, the scorpion replies that it was in its nature to do so. If the frog is the voter that cast thier ballot for mickey mouse in 2016… can you guess who the scorpion is???

If you are a company founder and/or controlling equity holder in a technology/services company that is under 30 million in revenue and you are deciding whether or not to sell your company, this post is for you. We have documented our experience with a 20-step sale process to support the founders who might be at the base of this mountain looking up.

First, the basics

Over time, a small tech company will do one of four things:

Grow and become a medium/large business (and possibly go public)

Become a lifestyle business

Go out of business or

Sell to another successful business and be merged into another company.

For a company to continue to grow successfully, founders or managers need to make incremental investments that enable the company to get to its next stage of growth. For example, small companies that start to hire employees usually have to pay the employees prior to them being 100% productive. Then, a company needs to invest in a back office infrastructure, such as HR support to work with the employees, a recruiter to find new employees and accountants to measure performance so the business can function. These investments in growing a company are fairly straightforward when a company is young. If all goes well, the day comes when you hit a wall. In order to grow the business you have to make much bigger investments. Typically, you see a large, addressable market but to obtain a share you need to make a large investment. This, in turn, can put the company at risk if not executed well or if it was the wrong choice and/or the wrong time. Some of those investment decisions look like the following:

Add a national or worldwide sales/marketing team to get at all the opportunity

Invest heavily into your products to take on a bigger part of the market

Add new offices to scale nationally/ internationally or

Acquire another company.

At this point in a company’s growth, the owners/founders/board have a choice to make: either trade a portion of the company for private equity, take on debt or merge into a company that has the infrastructure to allow the company to capitalize on the market opportunity. Either way, for the owners of the company this is a huge decision. This post was written for the owners that may want to sell a controlling interest in their company.

Before you go any further, you need to know that this is going to take a lot of time, usually 4-6 months, and cost between 1%-7% of the company’s valuation, if you use an investment banker

Before you sell

Before you start the sales process, you’ve got to be clear about what you want to achieve. Considering what you want to do with the rest of your professional life after a transaction should be independent from the question: “Is it fundamentally time to do this transaction?”

Let’s look at some of those fundamentals:

You have taken the company as far as you can and it needs new leadership skills to take it to the next level. This self-rationalization of What Got You Here, Won’t Get You There (Goldsmith, Marshall) is a VERY large hurdle for many small businesses and they often screw it up. You must ask yourself if you need to sell to gain new management or if you are comfortable enough to step aside and let someone that has ”done it before” step in and run the company.

If you don’t grow, your competition is going to ruin you and you will have nothing to sell

Let’s make it more personal:

You have been slaving away building the company for a number of years, you’re tired and it is time to take some chips off the table.

The company has hit a wall and you know you need to invest big to get to the next level of growth but you don’t have the risk tolerance for investment or debt.

The company has co-founder conflicts that are inhibiting growth. You may not enjoy working together anymore.

Now, let’s make it real personal:

What are you going to do after the transaction?

Stay with the acquiring company? (you might have to for a while)

Move to the beach?

Start another company?

Be aware that staying with an acquiring company can be touchy. Founders that have been running their companies for years face large cultural shocks going into a new bureaucracy where they are not the top decision maker. However, the acquiring company may not be successful with the acquisition if you are not there for at least a year or two. Most company founders want their baby and employees to be successful so they do stay on with the acquiring company. However, if the founders have brought in professional management prior to the acquisition, it may be more important that the management go with the acquisition than the founders. The point is that this will be a negotiated term–Maybe staying with the acquirer won’t be required, but it’s something the founder(s) need to be prepared to have a position on and to negotiate.

Taking it to the board

Once you are motivated to sell and have made some personal decisions, it’s time to get the board of directors to agree that selling the company could be the right thing to do. Of course, in many companies the founder doesn’t have majority voting rights and the process may stop at this point. It’s a matter of getting 51% of the shareholder voting rights together, or 76% if a super-majority is needed.

Once the board agrees to explore a transaction, you need to decide who to bring into this highly confidential discussion. Think CTO or CFO initially. It’s rare that the founder can sell a company without the team’s help. However, confidentiality is crucial during this exploratory phase to avoid widespread employee stress, organizational chaos and possible defections before you have even confirmed that you will go through with a sale.

OK, now what’s the process?

Step 1: Understand the buyer’s motivation

Will another company buy you? Will a Private Equity firm invest in you?

As much money as it costs to sell a company, it costs a lot more to buy one. For a buyer to agree to start up its acquisition engine and invest in a company, the opportunity has to be worth the cost and effort. The exception is the “acqui-hire” in which a company just wants to buy talent because it’s less expensive than hiring it. That’s something we’ve seen in Silicon Valley, for example, but it’s not what we’re referring to here. Note: An “acqui-hire” still requires a certain amount of due diligence and contracts.

What motivates a buyer to purchase a “pre-revenue” company?

You have Intellectual Property (IP) that they want and it’s less expensive to buy it than build it or you own the rights that preclude others from getting into this field.

You have IP that they want and they don’t have the time to build it.

You have IP that they want and they don’t have the skills to build it.

What motivates a buyer to purchase a post-revenue / pre-profitability company?

You have a proven business model and it’s apparent that all your profit has been invested back into the company for growth.

You have exploitable assets.

You have a great management team that is capable of a lot more if capitalized sufficiently and focused.

What motivates a buyer to purchase a post-revenue / post-profitability company?

You are in a market they want to be in (buying customers).

You have key talent that they need.

They want to remove your company as a competitive threat and they want to control the market.

They need more products for their channel.

Most companies that are motivated to sell (outside of the Valley) are usually in the last camp. So how much profitability (usually how a deal is valued) does there need to be for a Buyer to agree to turn on its acquisition engine? It depends, but it is usually more than 2.5M in adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Company valuations also differ a bit for companies that are 5M and then 10M in adjusted EBITDA. By the time a company gets to 10M in adjusted EBITDA it is usually > than 100M in revenues and all the bigger companies have it on their radar.

Take a step back for a minute, a lot happens in the life cycle of a company between 2.5M and 5.0M+ EBITDA.

At 2.5M EBITDA:

The company has grown or is in the process of growing out of the lifestyle business. The first line of G&A and Overhead infrastructure is in place. Accounting is measuring performance, a human resources manager is hiring key positions for product growth and, most importantly, the CEO is developing an investment path channeling the profits to maintain and grow the business.

At 5.0M+ EBITDA

The company has created a lot of policy and likely has grown out of the management team used to get to the 2.5M EBITDA level. The CEO should be looking at the quality of his management team and creating an organizational chart that scales. Typically this means firing a lot of people that created the path to the 2.5M EBITDA level. In the eyes of the buyer there is a lot of inherent value in this position because integration theoretically will be easier.

As you put together the list of potential acquirers and or private equity firms, you need to understand their motivations clearly before you invest your time as each one of these discussions is both risky and costly.

Step 2: Private Equity or Cash?

Selling for Cash

Most companies don’t get sold for 100% cash. The reality is that most transactions are a combination of cash, stock, employment agreements and earn-outs. If you are not flexible when it comes to the structure of the transaction, you could have difficulty selling your company or will be paid considerably less than if you had been more flexible. From the investment banker’s point of view the company can name the price and they will dictate the terms. Flexibility could help to get a deal done.

What motivates a buyer to pay all cash?

They have to because you are the only asset they can buy, they want you badly and it’s the only deal you will accept (rare).

You are a small investment.

Cash is king and they can get a cheap price.

Private Equity – A second bite of the apple

Founders who go down the private equity path may be able to maintain control of the company if that is their desire and, ideally, they are capable of delivering. When a private equity (PE) firm buys a portion (30%-70%) of the shares of a company, usually at below industry valuations, it’s called the “first bite.” This allows the company owner(s) to reduce their risk by taking some money off the table. The PE firm wants the owner to retain a high percentage of ownership so they are motivated to help the PE firm grow the asset.

The PE firm will usually then try to merge or “roll up” the target company with similar companies to increase the EBITDA and encourage cross selling to each companies’ customers with the goal of selling the bigger company within five years. As a partial owner of the larger company, the original target can then sell for a larger multiple. Thus, the second bite of the apple.. The theory is that the individual companies would not have qualified for this higher multiple without the PE firm.

Step 3: Understand how long this will take.

Welcome to capitalism. Selling a company depends on supply and demand. If what you offer is in low supply but high demand it will go fast. However, if this is not the case, it will really depend on the economic environment and how many offers you want to entertain. Keep in mind each offer takes a lot of time and effort to investigate and increases the risk of hurting your company’s brand with employees, partners and customers.

How long it will take will also depend on how well prepared a company is in advance.

Things you need to do today, if you ever plan on selling your company in the future.

Organize the easy stuff.

Everything in electronic format, all contracts, NDAs, TAs etc.,

Stock price valuations, document the methodology in detail and include in BOD minutes,

Board minutes,

Policy handbooks,

Employee files including a salary history and job functions,

Taxes, up-to-date with a strong known firm and

Well-documented business plan, past and, more importantly, that will make sense from the elevator speech to the contract waterfall.

The right management team including quick answers as to their level of involvement in the company (Internal facing and customer facing);

The reality is that the easy stuff has to get done or due diligence will be a nightmare and the hard stuff is what drives up valuation. Many founders will bring in professional management two years before the start of the acquisition cycle to get the hard stuff right so the valuation of the company goes up. In many cases it is worth the investment.

Step 4: Understand how much this will cost.

So here is the gamble: If you prepare well for a sale but you don’t sell, you are going to be out a lot of money. However, if you do sell you can add what it costs back in as ”adjusted” EBITDA. The hard costs are made up of legal fees, accounting fees and the investment banker’s fee. The soft costs are made up of opportunity cost—what you and your team could do with all the hours you are going to spend getting a deal done. Other soft costs are the risk you expose your company to if your partners, customers and employees think you are selling your company.

Investment Banker Cost

There is normally a retainer, about $50,000 for out-of-pocket expenses, a minimum fee of $200,000-$2 million for the big guys and/or a percentage fee such as 1%-5% of the total purchase price. These fees are negotiable! Busy firms are unlikely to negotiate fees much, but you have to give it a try. Ask them to shift fees to a success basis to align goals and increase motivation–give them an initial fee at the low range and a higher fee as a reward for success. For example pay them 1% below $XX million, 1.25% from $XX + 10%, and 2% above $XX +20%. They may say no, but it will never hurt to ask.

Your Team’s Time & Effort

Selling a company can easily take 20+ hours a week of your time and as the process progresses this will be a full-time job for your CFO and legal counsel. Furthermore, in the late stages you will have to pull in more and more internal staff to answer questions and meet with the buyer’s internal staff. The unintended impact could increase as more employees know about a potential acquisition and start wondering if their jobs will continue to exist and if they need to exit.

Taxes

A deal’s tax consequences could be large and complex, depending on the structure. It’s worth investing in trusted professionals who can break down a deal into favorable terms you can understand. It is very likely that the accounting and legal firms that you used to grow your company will not have the dynamic capabilities to structure the best possible transaction. Flexibility and complete understanding of deal structure is important because some of the merger, reorganization and recapitalization can be structured to defer some taxes or transfer them in the form of an acquirer’s stock.

Effective accounting practices are equally important at the formation of the company, for example classifying sale income as long-term capital gain rates versus ordinary income rates. Often missed is the impact of the option holder payouts that can be in the form of ordinary compensation if options are not executed. If this is paid by the selling company, then a large expense resulting in a tax loss and potential tax loss carry backs means a tax refund for the option holders.

A Sample Deal

What might a 20M Company transaction look like in terms of costs and your team’s time if you are paying your lawyers $400/hr and your accountants $300/hr? It could look something like this:

Step 5: Hire an investment banker.

Great investment bankers have both access and experience in getting company founders what they want and what they are worth. Without an investment banker you may not be seeing every company that would pay a great value for your company and you might not get the best deal.

Unless you know your market cold, what you are worth and who is going to acquire you, it’s wise to engage a good investment banker. Be sure to confirm that the investment banker will have sufficient time to work on your deal when it needs to be done.

Find the best investment banker.

Pick the firms you want to talk to, send each a confidentiality agreement, your financials, your projections and your business plan. Have them to present to you. Look for chemistry because you will spend a lot of time with this person and eventually they will be everything from a moderator to a negotiator and even a psychologist.

Some ”more generic” firms will build a detailed “book” on you and then shop it to 100+ companies and then begin to narrow down the companies that are interested in a pitch. Other “more narrow in focus” firms will have a great idea of the five or so companies that they know are both acquiring companies and will see what you have as a value. The danger with going to the ”more generic” firm is that the market, including your competitors and employee networks, will know you are for sale.

Step 6: Build the pitch.

When it’s time to present your business to potential buyers, bring in the pros. Get a professional PPT designer to create your deck. Keep it concise with lots of illustrations. A pitch includes:

Agenda

Vision, Mission and Goals

History

Overview, including legal entity, ownership structure, number of employees/ICs, locations, and org chart

Value to clients and your differentiators

Addressable market, such as size, current %, potential % over time and growth inhibitors

Customers and related revenues, contract values, profitability and period of performance

Offerings

Technology

Demo

Patents

Partners

Opportunities

Forecast and

Current Financials.

Practice with your team and investment banker. Get the timing down to less than an hour.

Step 7: Target the buyers.

A great investment banker has sold many companies and has a broad network of CEOs and executives in corporate development groups within companies. If you have chosen well, your investment banker’s network is a great place to start.

Be careful with both partners and competitors. Once your reach out to them you can never put that cat back into the bag. Understand the consequences if you go down this path. It’s best to let your investment banker handle these discussions with the right confidentiality agreements in place.

Other potential buyers include:

Companies in the same core vertical

Look for companies that may want to expand within the vertical your company is in but not in your specific area. Check if they are equity backed or have a large amount of cash on their balance sheet—these are great targets.

Companies with similar cultures

You want the acquisition to be a success for both your employees and potentially any long-term earn out scenarios. You also want to have a successful acquisition on your resume if you plan on ever building another business. So it’s important to ensure that whatever company you are considering selling to has a culture that your employees can successfully live with.

Step 8: Understand your valuation.

Don’t confuse what you are willing to sell for with what your company is worth. This step in the sale process is about what a buyer is willing to pay for your company. You will hear people say things like “it’s all about the Multiples”—well that’s not really right. You may hear “A growing software company is worth five times their trailing 12-months revenue,” or “10x profit.” Those general rules are good things to know if you can get the data on many similar deals in your market during the same economic climate. However, in the end it basically comes down to supply, demand, fit and motivations. What amount will the shareholders accept to sell their company and does the estimated purchase price match those expectations?

Supply / Demand is straightforward. In a down economic climate, the acquisitions that are done are those in which a company flush with cash is trying to take market share. In an up economic climate, it comes down to how many buyers are out there and how many companies like yours exist. This is where the Net Present Value model comes into play.

The Net Present Value Method (NPV) for business valuations is one of the most theoretically sound methods for valuing the potential cash flows from operations of most businesses. It takes into account the weighted-average cost of capital (WACC) and assumes constant effective tax rates and capital structure going forward. This method also takes into account as much public information on comparable sale prices, corporate betas and potential terminal growth rates as possible.

Keep in mind that even though these broad models drive the basics of the deal fit, motivations are what drive the end price and terms of the deal.

Fit—How well do you fit what the company is looking to acquire and how badly do they want it?

Motivations—How badly do you want to sell, is the number what you want and can you live with the terms

Side note: If you are a C-corp you were required to apply a valuation to your stock and record that number each year during a board meeting. Did you use a consistent methodology over the years? If not, this can be a major concern of any buyer.

“Following record high deal value of more than $250 billion in 2012, and more than $600 billion of acquisitions during 2010 to 2012, many companies pivoted their focus to the development of recently acquired reserves, resources and acreage.” After years of deal-making and robust merger and acquisition (M&A) activity globally, oil and gas companies shifted their focus in 2013 to developing their vast inventories of previously acquired reserves, resources and acreage, says information and insight provider IHS (NYSE: IHS). As a result, transaction value for global oil and gas M&A deals fell by almost half during 2013 to $136 billion, the lowest level since the 2008 recession. According to IHS energy M&A research, worldwide deal count declined by 20 percent from the 10-year high in 2012, and after a very sluggish first half of 2013, deal activity accelerated during the second half of 2013.

What is”adjusted” EBITDA?

EBITDA (Earnings Before Interest Taxes Depreciation Amortization) is an approximate measure of a company’s operating cash flow based on data taken from the company’s income statement. It is calculated by measuring earnings before the deduction of interest expenses, taxes, depreciation and amortization.

Since the distortionary accounting and financing effects on company earnings do not factor into EBITDA, it is a sound way of comparing companies within and across industries.

Adjustments or “add-backs” are made to the EBITDA. These might include, among others, excess owner compensation, non-recurring business expenses and expenses personal to the current ownership.

The ADJUSTED EBITDA calculation is of interest to company owners, bankers and business buyers since ADJUSTED EBITDA is the normalized free cash flow that a company has to service any proposed debt.

Step 9: Create your ”Pre” due diligence package.

If the meeting with a prospective buyer goes well, they will ask you to send over your latest financial statements (TTM – Trailing Twelve Months and FTM – Future Twelve Months). Have this package already prepared and keep it updated. Your investment banker will be highly involved at this point and controlling the messaging between you and the buyer. This marks the line in the sand at which the next exchange is either an offer letter or the buyer walks away.

Based on the temperature at this phase, data room preparation should be in full-force (Step 13).

Step 10: Get a preliminary offer: The Letter of Intent.

OK, you have impressed the prospective buyer enough to make you an offer. Now the key is to determine if you want to accept the offer and its terms or want to negotiate those terms. Here is the basic framework of a Letter of Intent (LOI):

Dear [Business Owner]:

This letter is intended to summarize the principal terms of a proposal by BUYER, to acquire directly or through a subsidiary, one hundred percent (100%) of the stock of SELLER. (the “Company”), from OWNERS, and all other shareholders (the “Sellers”). …….. The Parties wish to facilitate BUYER’s due diligence review of the Company’s business and the negotiation of a definitive written acquisition agreement (the “Agreement”). Based on the information currently known to BUYER, it is proposed that the Agreement include the following terms (examples below):

The purchase price for the Acquisition is X.

The Parties will agree on a Closing date target amount for the Company’s working capital (the “Working Capital Target”).

At the Closing, KEY PEOPLE will enter into retention and non-competition agreements in favor of BUYER for a XX-year term.

BUYER agrees to continue to provide Company employees with benefit plans that are either existing or comparable to those now provided.

BUYER and the Sellers shall each pay their own expenses in connection with the Acquisition.

To assist BUYER with its continuing confirmatory due diligence investigation, the Company shall provide (the list will be long).

No Shop Period. They won’t want you on the market during the due diligence period.

Confidentiality clauses

Clauses that ensure you refrain from any extraordinary transactions, such as distributing.

I personally look forward to developing a strong long-term relationship with the officers and key management of SELLER and am pleased to be able to make this offer. Please sign and return this letter at your earliest convenience.

Sincerely yours,

BUYER CEO

Confirmed and agreed to by SELLER

Assuming you sign the letter and return it to the prospective buyer you are now off the market. If you want a counteroffer make sure you get it before you sign the LOI and return it to the buyer.

Step 11: Shop the offer.

This is a delicate dance. You don’t want the current offer to go cold but you should see what others are willing to offer. If you are successful in getting meetings with potential buyers, you will have a few of these pitches going on at the same time. You will have multiple offers, or at least a group of companies that have not yet said “no” to which you can go back. Tell them you have an offer and if they want to beat it they need to do it with in a certain time-frame. Take a deep breath.

Step 12: Accept the offer to move forward.

It’s time to call a board meeting.

Step 13: Start building the data room for due diligence.

Before you begin the hard work of building the documents necessary for due diligence, you must work out the best place to store them. You need to find a secure place where multiple people from different companies can gain access to relevant company documents. SharePoint, DropBox, Skydrive are all possibilities but have limitations. If your investment banker doesn’t have a secure server that offers this service, you might want to question why not.

So what documents are you going to need? The list is long—here are some good examples:

Basic corporate documents

Legal entities with corporate docs

Board minutes.

Stockholder information

Cap schedule

Current owners

Option agreement documentation for each employee.

Loan agreements

Line of credit documents.

Commercial contracts

Customer contracts

Third-party contracts

Teaming agreements

Non-disclosure documents (NDA)

Subcontractor contracts.

Intellectual Property

Patents

3rd Party licenses.

Litigation (Rulings, pending litigation with applicable estimated liabilities and how it was accounted for in the financial statements, ITAR rulings, audit rulings, patents, et al)

Employees and Management

Employee census

Employee benefits and handbooks

Incentive plans

Vacation accruals

Employment agreements.

Financial Information

Forecast Waterfall – This is essentially a spreadsheet with all the following columns and will be the basis for your multi-year forecast:

Taxes (All returns since the beginning including any notices and remedies received.)

Security

Security Clearance documents.

Step 14: Build the Q&A tracker.

The acquirer’s lawyers and accountants are going to be asking hundreds of questions as they go through the documents in the data room. Create a shared spreadsheet as a record of all questions asked and the answers that all the entities can access. It will have at a minimum the following columns:

Date submitted

Who asked the question

Priority level (high, med, low)

Category (map to folders in data room)

The question

The answer

Clarifying questions

Status (open, closed)

Date answered.

Keep updating the data room and reference in the data room where they can find the answer.

You can expect several hundred questions if not more. Your investment banker should be monitoring and involved in answering questions. Answers should be concise and answer only the question asked. If there are “issues,” and anticipate that there will be, speak to the facts. If the question results in presenting a piece of information that you know will lead to several more questions, answer the question asked and then starting working on your damage-control plan in the background. Be prepared to address it. Part of selling your company does not mean the problems leave when the transaction is over. You still handle them during your earn-out period, however, you are a lot richer! Demonstrating problem-solving skills is an asset.

Step 15: Build the schedules.

Disclosure schedules document the representations and warranties contained in the Securities, Purchase and Option Cancellation Agreement (SPA), covered in the next section. The seller uses disclosure schedules to reveal exceptions and provide information that would be too lengthy for inclusion in the SPA agreement.

Who builds the schedules? Your CFO and Lawyers.

If you do a great job building your data room, the schedules are easy to prepare and possibly done by the lawyers for SPA presentation.

A list of schedules you may be asked to provide includes:

Company stock, including name, outstanding, share type and, in the case of multiple companies, clear articulation of what they need to buy;

Quick monthly financial closing updates to review during diligence period versus budgets. Try to mirror the cycle for which the acquirer closes its statements;

A waterfall detailing existing and potential contracts / customers. How does this tie into future customer relationships and strengths? Highlight value and blue oceans based on information from buyer’s web site;

Working capital calculation and detailed understanding of historical and future balance sheet relationships;

All material contracts other than customer;

All current customer contracts;

All outstanding bids;

Company tax returns; and

Any tax audits.

If you are doing federal work, include the following:

A list of any government provide equipment

A list of all security clearances and all pertinent information for each employee

This is the step in which your lawyer makes money. The SPA is a long legal document that contains difficult language and each word is very important to understand. A great investment banker will help you negotiate all the conflicts between what you want and what the acquiring company specifies in the SPA that it is willing to do. Most of this should have been worked out prior to the SPA but there will always be surprises that need to be addressed.

Most SPAs will include sections for each of the following: (Many references are made below to expert documents on each subject that we suggest you review.)

Escrow

Escrow is an arrangement made under contractual provisions between the buyer and seller whereby an independent, trusted third party receives and disburses money for the transacting parties. The timing of such disbursement by the third party depends on the fulfillment of contractually agreed conditions by the transacting parties.

Representations and warranties are statements made by a party in an agreement referring to facts or matters about the party making them. They speak both negatively—e.g., “there is no litigation pending, or to the knowledge of the company, threatened;” and affirmatively—e.g., “each of the company’s employees earning more than $100,000 per year is listed on Schedule A.” These representations, or “reps,” are negotiated over issues such as whether individual reps are qualified by the “knowledge” of the person making them or whether an individual rep is made only as to “material” matters. A vital counterpart to reps and warranties is the disclosure schedule.–From Matt Schwartz’s article “Mergers and Acquisition: The Basics”.

Covenants exist to assure the buyer that the acquired business will not change significantly during the period between signing the acquisition agreement and closing the acquisition.–From Matt Schwartz’s article “Mergers and Acquisition: The Basics”

Conditions to Closing

Conditions to closing recite things that must happen, or not happen, for each party to be obligated to close the acquisition.–From Matt Schwartz’s article “Mergers and Acquisition: The Basics”

Indemnification

Indemnification refers to who must pay for liabilities resulting from the acquisition and incurred by the buyer after the closing.–From Matt Schwartz’s article “Mergers and Acquisition: The Basics”

Key employees and Employment Agreements

“Key employees” are those employees that are necessary to ensure the asset will be successful post acquisition. Examples: The head of the application development group, the execs that own the largest customer relationships and the business group leaders.

The more “key employees” a buyer flags, the more risk there is to getting the acquisition done as these people will all be given non-compete agreements with compensation tied to them staying on for 1-3 years. Usually the seller holds back money to incentivize these people to stay so it’s also costly to identify too many “key people”. All key people will also need to be brought into the acquisition discussion so there is risk there too. There is a great read on finding key employees in your organization by Shari Yocum, Tasman Consulting LLC. “Will the real key employee please stand up? “

Non-compete agreements

In order to ensure that the value of the asset acquired is fully transferred to the buyer, the seller (and possibly other employees) might have to be placed under an obligation not to compete with the buyer for a certain period of time. For key employees transferring to the acquirer these agreements usually come with some sort of compensation paid out in the future. There is a great write-up on Non-Compete agreements here: “Mergers & Acquisitions Quick Reference Guide”. McKenna Long & Aldridge LLP. Retrieved 19 August 2013.

Earn-out

Earn-outrefers to a pricing structure in mergers and acquisitions where the sellers must “earn” part of the purchase price based on the performance of the business following the acquisition. In an earnout, part of the purchase price is paid after closing based on the target company achieving certain financial goals.

Merger and acquisition transactions almost always include a provision for a working capital adjustment as part of the overall purchase price. Typically, a buyer and seller agree to a target working capital amount which is documented in the purchase agreement. Buyers want to ensure that they are acquiring a business with adequate working capital to meet the short-term operating requirements. Sellers, on the other hand, want to get compensated for business that they have already performed and not give away excess working capital at closing.–From the Mclean Group, http://www.mcleanllc.com/pdf/Valuation Newsletter/BVWinter10.pdf

Step 17: Sign & close.

Signing — Depending on the number of shareholders it could take a number of days to get all the signatures and documents in place. After these are signed, THE DEAL IS DONE.

Closing — At this point you will have vetted out numerous versions of the merger consideration spreadsheet and a detailed flow of funds is presented to buyer to start moving the money. EVERYONE GETS THEIR CASH!

Step 18: Build a communication plan.

Maintaining good communication with customers, partners, subcontractors and employees is key to the company’s continued success. It is important to create an effective communication plan.

Speaking to Customers – Your customers need to know that their contracts and the people supporting those contracts will not be changing. Your most important customers need to meet the acquiring company. Most acquiring companies will make this mandatory during due diligence. Depending on the contract terms, some customers might even need to approve of the acquisition.

Speaking to Partners – Review all your OEM contracts, teaming agreements, MOU’s etc. and look for terms prior to meeting with each partner. The partners will wonder how this will impact their contractual relationship with the company.

Speaking to Subcontractors – Contractors will want to know if they have a home in the new company and if the terms of their contracts will change. When meeting with each of them you need to make sure that you are clear with how those contracts will transition and who their points of contact will be in the new company.

Speaking to Employees – Your employees are your company. Your legacy is that you’ve created a way for these people to prosper. They rely on you and this change can shake the fundamentals of everything they trust about the company. They will first want to know if they have a job in the new company. Then they will want to know if their benefits will change. Then they will want to know if their jobs/titles/compensation etc. will change. They will also want to know about additional opportunity for themselves in the new company. If you can help each and every one of them through these questions in a very thoughtful way you will have done your job and can feel good about the transition of your legacy to another company.

Speaking to the new company employees – The new employees will look for things that they can leverage with the new acquisition, such as new products they can sell to their customers. New quals they can put in RFP responses etc. In most cases they will be excited. The people at the new company that will be less excited are the ones in HR and Finance who have to do a lot of work to make the acquisition a success. The key to engaging the broad set of the acquirer’s employees is to get them involved early on and ensure you do town halls and “meet and greets.” The key to supporting Finance/HR is to ensure they have the bandwidth / resources to handle the acquisition and make sure they have a plan (timing/activities/owners).

Press Release – The Press Release should be mutually agreed upon between you and the Buyer.

Step 19: Celebrate!

Have the investment bankers buy you a nice dinner, they will be marketing for the next deal.

Step 20: Integrate your company into your new parent.

Entire books have been written on this subject because the success or failure of a merger or acquisition often depends upon integrating two entities successfully. Here are a couple of interesting things we can point out:

The CFO challenge – Usually the CFO is incredibly engaged in an acquisition and gives many 80 hour weeks to making the acquisition happen. However, the challenge is that most buyers already have a CFO and there really isn’t room for your CFO. You need to have a conversation with your CFO about this potential issue long before you start this process and determine what incentives need to be in place to ensure an effective transition if the new company does not have a home for your CFO.

The HR challenge – Usually a buyer has an HR team and it’s normally more sophisticated than yours. The key is to talk to the buyer through the deal about this issue prior to engaging your head of HR in the acquisition discussions. You need to have a joint plan with the buyer on how to handle the issues here as the HR team will be key to both due diligence as well as a successful transition.

You and the buyer should have a tactical plan (what is done, who does it, when, what are risks) for how the following will be migrated:

Payroll

Timekeeping/Expense reporting

Accounting – Someone from the acquiring firm must be assigned to build a tactical plan for absorbing each contract into the new companies accounting system. The acquiring firm should be able to keep a close eye on the financials from the time the contracts were in the old system through when they are in the new system without any lack of visibility to revenues and profits. The test the acquirer should ask –‘can we do a reforecast of the business we just bought?’. If the answer is ‘no’ then they are not doing an adequate job and someone is not going to get paid or a check is not going to get collected.

Accounts receivable

Accounts payable

Contract transitions

Benefits and 401k programs

Performance reviews / raises

Taxes

Budgets, forecasts

Email migration

Website

Any employee titles that will need to change – This can be a delicate issue given smaller companies have a tendency to over inflate titles and when migrated into a new organization a VP may now be a Director but still have the same responsibilities.

Working with employees that will have job responsibilities change.

As you can see, your current HR and CFO are very important to the success of the integration. Don’t make the mistake of losing them.

It is important to avoid questions like “Who do I report to?”. Both companies are still in play and individually successful, however, a detailed mapping of the organizational chart must take place and be clearly articulated to every employee more than once. The mission statements are merging and expanding; this is not easy and should not be understated in importance. Messaging must be created at the senior levels and frequent touch points articulated.

It will be important to get involved early in the company’s employee communication tools. If the company does town hall meetings then make sure the acquisition is discussed and the people are introduced.

Things that can screw up the deal: pre/post-closing

Pre-closing

Contracts that require pre-closing consent to assignment

Teaming agreements/Contracts that lock you out of markets

Product ITAR issues if the acquirer plans on selling your products to international markets

Employment contracts with key employees that do not fit into acquirer’s compensation model.

Post-closing

Internal integration that is ignored and losing the voice of the employees that made it successful

How the buyer is going to measure the seller in subsequent periods (Typically the earn-out provisions require measurement and will determine how that is going to be calculated and what burdens are going to be used)

Responsibility for post-closing working capital calculations (Do the definitions in the SPA make sense or leave a little flexibility for reality?)

When a company is preparing for an exit they are usually trying to make the EBITDA as good as possible. Many deals have adjusted EBITDA as the driver of how big the deal will end up. Hence, many executives in the selling company will starve the company for investment in the last year or so. The Acquirer has to recognize this and they have to not only come up with the money to buy the company but they also must be willing to invest to truly achieve the value of the deal.

In today’s tech services economy (especially in the US Federal government) Systems Integrators / Contractors have to bring additional value (frameworks; code; subject matter expertise) to the customer to win. It is not enough anymore to be a professional services company especially with the onset of the “Cloud” services economy. Because of this services companies are buying up tech companies to add to their qualifications. However, services companies need to be very careful how they orchestrate success for both the services business and the new product business.

Here are a few recommendations:

#1 Don’t mix the P&Ls below the CXO level. Resources need to stay on one side of the p&l or the other.

What happens if you mix?

Every product sales is a different variation / customization of the product and there is never a version 1,2,3,4 etc..

Profit on products hide sins of the services business and Revenue of the services business hide sins of the product business

You won’t do either well as you will be trying to take services profit to do long term R&D for the product or you will be taking product people and making them billable

Services will usually be a bigger part of the company with more executives. The products may be buried in the organization and then the exec bureaucracy start ordering the product guys to do x, y and z and then there is all out chaos.

The Services arm will always push the product arm to do more than the product is designed to do at its current release… For example, Microsoft and Oracle are always asked to add features and functions to their products by their customers and they add those requests to the list of thousands of others and prioritize the next releases features based on the size of the market for those features. But a services company can fall into the trap of pushing 1 clients features above all others because that is the engagement they are currently billing.

In today’s LPTA (Lowest Price Technically Acceptable) contracting environment Service organizations are driven to constantly lower their indirect costs in order to bid the lowest hourly labor rate possible. This is in direct conflict with the need for a Products business to invest current year dollars in IR&D (increasing current year Wrap rates), in order to gain future revenue. This tension usually results in the IR&D budget being trimmed for the sake of a lower wrap rate, and product development suffering.

Services ‘business/suit’ culture doesn’t map to product casual culture. You won’t get the best talent

#2 Staff your product business appropriately–You need a product manager, dedicated product team, dedicated product marketing, channel support and sales tech/business infrastructure. You need to run the product group as a company with an R&D investment budget and P&L expectations.

#3 Create a reseller contract between the Services groups and the Product groups. This enables your Services BD to fully discount products at an agreed to level.

#4 Empower your product business to work with other services firms and not exclusively with your services groups. Your Services BD will always be able to reach in and pull the product sales into deals easier than your competition.

I attended a Google Glass Meetup in DC last week and was very impressed. I’ve not seen this much interest by developers in a platform since the launch of the iPhone SDK in Feb 2008. I learned early on when I was working at MSFT that a platform will be successful if it is viral with developers—something I believe MSFT has lost over the last 10 years (possibly more on that in a future blog). This new Glass platform already seems to be becoming viral. Can they continue to grow momentum?

I personally don’t think that Glass (or competitors to Glass) will be as big a market as the smart phone but I do think it will be substantial. I say this because Glass in many ways is really an accessory to a smartphone much like a Jambox or Fitbit. That being said, it is a lot more functional because apps will be designed/developed for it exclusively.

First, some facts I learned at the event:

There are ~8,000 units out there and the original units were $1,500 each. This price needs to go down if these are to become ubiquitous…

The device requires a phone running Android 4.0.4 and higher (connected via Bluetooth). They are going to have to support iPhone but no mention at event. I did read this article that mentions there will be some support. Google will have to balance the need to push Android with the fact that iPhone is a huge market. It will be fun to watch how well they walk this line…

Display resolution is 640×360 and it contains a 5-megapixel camera, capable of 720p video recording

Ships with Wi-Fi 802.11b/g and Bluetooth

16GB storage (12 GB available) and 682MB RAM

Bone conduction transducer for sound—yea that sounds painful…

The apps don’t run on the glasses, they are essentially HTML pages (they call them cards) that are hosted at Google and called via API (there is no SDK). I would think that this would make it very difficult to build the types of games that smart phone users are accustomed to… Makes me wonder—without a large number of games, what drives the initial momentum? However, I’ve come to the conclusion that there is enough momentum via smartphone users and productivity apps, so it won’t matter. More here.

New York Times already has an app. I think they are one of the only 3rd party apps right now. I heard there were others from Path, Skitch and Evernote but did not see them. I’m sure there are many others…

There is not a marketplace for apps yet but that is coming and Google has not announced a way to monetize apps… this will be key for success…

Great companies are already on board developing such as http://dsky9.com who presented at the event

The new brand is going to be “GlassXXXX” like apple has “iXXXX”. So they talked about an app called GlassFit, like iFit…

This is a platform that will require people to learn minimalist design…

Some of what I was thinking about while I watched the demo: I’m an engineer at heart so I like to think of things within frameworks. Let’s first look at why smartphones are successful and eating away at the laptop/PC market share—I created what I’ve called the value pyramid (see graphic below). Think about laptops versus smart phones and tablets within this framework; I believe laptops/PCs are losing market share because a majority of what has tied people to a desk the last 20 years can now be done via a smart phone / tablet. Laptops are still very important devices for collaboration and creation but not for all the other layers of the pyramid. When thinking about a product like Google Glass against such a pyramid, I start to wonder if the device will make the functions of the lower levels of the pyramid easier or will it start to effectively erode the collaboration/creation level. My take is that the latter will be very hard to do given limited user experience. So Glass must make the lower levels of the pyramid even more productive for a user in order for the device to be become ubiquitous.

At first I want to compare using the Glass experience to what I do on my smartphone… When does it make more sense to use Glass versus my smartphone?

Search: I’m the kind of person that is always asking Google who, what, when and where questions and if I could do that easily without pulling out my phone it would be worth the investment (I have an 11 year old and he asks me a ton of questions). It is also clear to me that having the knowledge of what is around me is interesting as well and can be leveraged.

Consume: I’m not sure about this one. I think I’d use the device to consume content if I owned it but I’m not sure I’d invest in the device to get my New York Times. Am I wrong?

Gather: Again, I’d probably use the device for taking pictures/videos but I’m not sure I’d invest in the device to gain this experience—maybe I would if I were in the media business but not sure…

Interact: It’s clear that if Glass can absorb my surroundings and provide me data that makes my golf game more accurate (check out http://icaddy.com ), my running experience more successful or lowers the risks associated with me piloting an airplane etc. it would be adopted by those that care about such things. I’m not positive I’d use the device for sending TXT’s or emails, but I’m open to it if the experience is better—for example, will it read my message to me and can I speak and the device easily sends the message in whatever language I want? Even better, can it very effectively allow me to communicate with someone in a language I do not know? Even better—can it help me do a job I’m not qualified to do—like build a Cobra? If so, then yes, I’d invest if it was super easy (again, needs great design). On the point of email, I do think that many people like to be absorbed in their phone and tune out to the rest of the world. Will they invest in Glass for just the email/TXT experience? I doubt it…

Transact: I doubt I’d use the device to do a bank transaction or to sell stock or to buy something on Amazon, but I’m open….

So do I think the device will be successful? Yes! Why? Because just the baseline Search is a value add worth paying for. Do I think it will be ubiquitous? Maybe. I think that comes down to Glass’s ability to help people interact with their environment. If it makes me a better golfer there is no stopping its growth 🙂 .

Many others in the industry think this is going to be huge as well–IHS, a forecasting firm, estimates that shipments of smart glasses, led by Google Glass, could be as high as 6.6 million in three years <see here> and Google Ventures Launched a Glass Collective With Andreessen, Kleiner Perkins to fund Google Glass startups—all great signs that this is a new / important platform.

If you run a startup that does software R&D you will eventually be engaged in a discussion about capitalizing or expensing research and development costs. Here are a few good reads. If you see others with differing options please send them my way.